It looked like things were turning up in Asia. Better economic data in the US, Europe and Japan suggested Asian exports would benefit, lifting the region’s growth rate. But while the West is on the mend – if only very gradually – shipments from Asia have not received their customary boost.
The reasons include declining competitiveness and demand from advanced markets shifting away from imports. But whatever the cause, it doesn’t make life easier for Asian officials. Local demand has also weakened, reflecting slowing productivity growth and deliberate financial tightening.
This year started with most Asian data showing lacklustre growth. China’s economy didn’t snap back from its traditional Lunar New Year lull as quickly as previously. Japan’s expected spending surge before the sales-tax hike turned out to be rather muted. Elsewhere, exports failed to fire up, weighing equally on sentiment and production.
China’s growth is below its accustomed pace, but the slowdown is in part desired
With few exceptions – New Zealand is riding high on a wave of milk exports – growth across Asia remains stuck in slow gear, losing even further speed in recent months.
But there doesn’t need to be a nasty accident lurking around the corner. For all the gloom, the region also boasts enviable strengths. China’s growth is below its accustomed pace, but the slowdown is in part desired. Beijing has started a round of structural reforms that should ultimately put the economy on a more sustainable path. Tighter financial conditions will slow activity but China retains powerful tools to put a floor under growth.
We believe China’s government will deliver growth of around 7.4 per cent for 2014, implying that the pace of activity will pick up over the second half of the year, and return to 7.7 per cent next year.
In India, too, things may not be quite as dire as they first appear. After slowing sharply late last year, indicators suggest a steady uptick in manufacturing. Much will depend on the government and its ability to drive through structural reforms, and it may take time before investment responds. We forecast GDP growth recovering to 5.3 per cent this year and 6.3 per cent in 2015.
In Japan, growth should recover in the second half after a temporary lull caused by April’s hike in sales taxes. Here too, a convincing stab at economic reforms is required to boost corporate investment and make recent gains stick but we are looking for 1.0 per cent growth this year and next.
Meanwhile, in Australia, despite a challenging adjustment after an unprecedented boom in mining investment, there are signs that economic rebalancing is well underway. The central bank may thus be already at the end of its easing cycle. After 2.8 per cent growth in 2014 we are forecasting 3.2 per cent for next year.
In the region’s smaller economies, the picture is mixed. Exports may not be as strong as hoped, but overall growth is still supported by unusually low interest rates. With inflation not posing a risk for now, whether in Asia or elsewhere, credit growth will continue to lend support to local demand. That cannot continue indefinitely, but it’s good enough for now.
This research was first published on 3 April 2014.